Understanding How Insurers Use Credit
A growing number of personal auto and homeowners insurance companies now use consumer credit information to decide whether to issue policies and what premiums to charge for those policies.
This fact sheet is designed to help you understand how your credit information is being used, and how it may affect your insurance purchases.
Is it legal for an insurance company to use my credit information without my permission?
Yes. A federal law, the Fair Credit Reporting Act (FCRA), states that insurance companies have a “permissible purpose” to look at your credit information without your permission.
Why do insurance companies use credit information?
Some insurance companies believe there is a direct statistical relationship between financial stability and losses reflected in a credit score/insurance score. They believe that as a group, consumers who show higher credit scores have fewer and less costly losses, and therefore, should pay less for their insurance. Conversely, they believe that as a group, consumers who show lower credit scores have more and costlier losses, and therefore, should pay more for their insurance.
What kind of credit information are insurance companies using?
Although some insurance companies still look at your actual credit report, most companies now use a “credit score” or an “insurance score.” A score is a snapshot of your credit at one point in time.
Insurance companies and entities that have developed credit scoring models use several factors to determine credit scores. Generally, the higher the number or score, the greater the responsibility the consumer is perceived to have.
Following is a list of the more common credit factors used in determining credit scores:
- Major negative items: bankruptcy, collections, foreclosures, liens, charge-offs, etc.
- Past payment history: number and frequency of late payments; days elapsed between due date and late payment date.
- Length of credit history: amount of time you’ve been in the credit system.
- Home ownership: whether you own or rent.
- Inquiries for credit: number of times you’ve recently applied for new accounts, including mortgage loans, utility accounts, credit card accounts, etc.
- Number of credit lines open: number of major credit cards, department store credit cards, etc. that you’ve actually opened.
- Type of credit in use: major credit cards, store credit cards, finance company loans, etc.
- Outstanding debt: how much you owe compared to how much credit is available to you.
Must an agent or company tell me my credit score?
No. In fact, the agent or company underwriter might not even know your actual credit score. Instead, all your agent or underwriter may know is that your score qualifies you for a particular tier or company within the group.
However, even if you know your credit score, it may not be useful to you. Since a score is just a snapshot of your credit information on a particular day, your score could change any time there is a change in your credit activity or a creditor reports information to a credit bureau.
In addition, insurance companies use different credit scoring models, so your score could vary from one insurer to another, depending on which factors a company uses in their model and the weights they assign to the factors.
Lastly, since the national credit bureaus don’t share information, your score may change depending on which of the three national credit bureaus report the information that goes into the scoring model.
How can I improve my credit information if I have been adversely affected?
Find out which credit information factors had a negative impact on your credit score. Your agent or company may be able to tell you up to four (4) factors that had the most impact on your score.
Insurers and credit scoring model developers suggest several ways to improve your credit score:
- Don’t try to “quick fix”‘ your credit overnight or you could end up hurting your score. Instead, understand that the most important factors generally are: late payments, amounts owed, new credit applications, types of credit, collections, charge-offs, and negative items such as bankruptcies, liens and judgments.
- Create a plan that will improve your credit over time. Pay your bills on time. Pay at least the minimum balance due, on time, every month. If you cannot make a payment, talk to your creditor. Work to reduce the amount you owe, especially on revolving debt like credit cards.
- Limit the number of new credit accounts you apply for. Several applications for credit in a short time will usually have a negative effect on your credit score.
- Keep at it. Your credit information will improve over time if you make changes now and continue to improve. If you show good credit behavior over time, your credit score may improve as a result.
What can I do if I suspect that my credit report contains inaccurate or erroneous information that adversely affects my credit score?
Review your credit report. Under federal law, you’re entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, and you ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You’re also entitled to one free report a year if you’re unemployed and plan to look for a job within 60 days; if you’re on welfare; or if your report is inaccurate because of fraud, including identity theft. Otherwise, a consumer reporting company may charge you up to $10.50 for another copy of your report within a 12-month period.
In addition to the report required to be provided to you as explained above, The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. The FCRA promotes the accuracy and privacy of information in the files of the nation’s consumer reporting companies. The Federal Trade Commission (FTC), the nation’s consumer protection agency, enforces the FCRA with respect to consumer reporting companies.
You should also get a copy of your credit report from each of the three national credit bureaus, which are listed below. Since the three national credit reporting bureaus do not share information with each other, if you correct an error on one report, it will not “fix” incorrect information on the other reports. You may have to pay a nominal fee (probably less than $10) for each report.
Tell the credit bureau about any errors. If you report an error, the credit bureau must investigate the error and respond to you within 30 days. The credit bureau will contact whoever reported the information (e.g. the bank, credit card company, collection agency, court clerk, etc.) to verify its accuracy.
If the disputed information cannot be verified, or if the reporting entity agrees that the information is incorrect, the credit bureau must remove, complete, or update the information. Also at your request, the credit bureau must send a notice of the correction to any creditor that has checked your file in the past six months.
If the reporting entity verifies that the information is indeed correct, the credit bureau will not remove the information from or change the information on your credit report. However, the FCRA permits you to file a 100-word statement explaining your side of the story, and the reporting bureau must include your statement with your credit information each time it’s sent out. Make sure your insurance company has a copy of your statement, and ask if they will take it into account.
Once the errors are removed or corrected, it’s a good idea to obtain a new copy of your credit report several months later to make sure the incorrect or erroneous information hasn’t been reported again.
Tell your insurance company about any errors. Don’t wait until the credit bureau investigates the errors to contact your insurer. Tell your insurer right away and ask if the insurer will wait to use your credit information until the errors are corrected. Small errors may have little or no affect on your credit score, but big errors can make a significant difference in your insurance coverages or premium.
The three national credit bureaus are:
- Equifax: www.equifax.com or 800-685-1111
- Experian: www.experian.com or 888-397-3742
- TransUnion: www.transunion.com or 800-888-4213
Where can I go for help with credit problems?
If you can’t resolve your credit problems alone, a non-profit credit counseling organization may be able to help you. Non-profit counseling programs are often operated by churches, universities, military bases, credit unions, and housing authorities. You can also check with a local bank or consumer protection office to see if they have a list of reputable, low-cost financial counseling services.
Some credit repair firms promise, for a fee, to get accurate information deleted from your credit file. Be wary of those entities because accurate information cannot be deleted from your credit record.
Remember, you have the same access to credit reporting agencies that credit repair firms do and you are entitled to dispute credit report items for free.
Where can I get more information?
- Ask your insurance agent or company if they have educational material that explains how they use your credit information.
- Search the Internet, but be sure the information you find explains how insurers (not lenders) use credit information. Some credit vendors offer services that allow consumers, for a fee, to see their insurance credit scores.
- Contact the Federal Trade Commission for information about the FCRA or their consumer brochures on credit. Call toll-free (877) 382-4357 or visit their website at www.ftc.gov.
- Contact the Utah Insurance Department by calling 801-957-9305 or toll-free at 800-439-3805.
Final Points to Remember
There’s a good chance your current or prospective insurer is looking at your credit.
Ask your insurance agent or company if they use credit information, how they use it, and whether it affects your insurance coverages, terms, conditions, or premiums.
Get a copy of your credit report from each of the three national credit bureaus and correct any errors. Tell your insurance agent and company about any errors and tell them your side of the story.
Improve your credit history if you have had past credit problems. Ask your agent or company for the top reasons (factors) that negatively affect your credit score and work to improve these factors. If you are paying higher premiums because of your credit information, ask your insurer to re-evaluate you when you improve your credit.
Shop around for insurance. Insurance companies use credit information in different ways, so your coverages, terms, conditions, and premiums can vary dramatically from company to company.